Pay Taxes with Credit Card
It’s hard to pay the government what they consider their share, but not paying them certainly has serious repercussions. For some of us, the bank accounts hold the money we need – stored up there painstakingly for months. For others of us, we’re caught a bit off guard and might find enough to buy a some stamps, but not enough to buy off the IRS this year.
This leads us to the common question: Should I pay my taxes with a credit card?
The answer, surprisingly, might be – yes!
The Downsides of Paying Taxes with Credit Cards
There are definitely some negatives to consider if you’re thinking about paying taxes using your favorite piece of plastic. The biggest concerns boil down to your typical financial habits.
- You’re going to be charged a fee. There is an extra “convenience fee” added to your payment when you use a credit card, or a debit card for that matter. Depending on where you make your credit card payment, you can be charged up to 3.93%. The fee for debit, or bank, cards is less at just under $4. If you’re making a very big payment, this can be a rather substantial penalty if you could just write a check or transfer funds from the bank.
- You’re going to deal with credit card debt for years to come. Unless you have the means to pay off that credit card debt in the next thirty days, charging your taxes might mean you’re saddled with new debt for years to come. Making the minimum payments on credit cards can leave you struggling under that debt and corresponding interest for decades. If you can’t pay it off right away, consider finding alternative solutions.
- You’re unaware that you can pay in installments through the IRS. If you’re desperate to pay that tax bill and think the credit card is your only hope, you’re dead wrong. The IRS, the caring entity that it is, wants you to pay your taxes. They make it a bit easier for you to do so by allowing you to set up payment plans for the amount you owe under $25,000.
- An Online Payment Agreement (OPA) or Form 9465, an Installment Agreement Request, will let you set up payments small enough to handle but big enough to get that debt paid off – unlike credit cards. There is an additional fee (0.25%) associated with paying in installments and interest charged on the balance you’re paying down, but at 5%, you’re going to get somewhere with these payments. We can’t say the same for credit cards that mire you in debt indefinitely.
- You might be penalized for a cash advance. If you do opt to charge your taxes on your credit card, your issuing bank might decide to view the payment as a cash advance and charge you an even higher interest rate than you normally would have. At the higher rate, you can expect to pay even more over time.
Why You Might Opt to Pay Taxes with Credit Cards
For every disadvantage about paying taxes with credit cards, you can find an advantage. In some cases, these are serious advantages worth seriously considering – especially if you already have the cash on hand. Of course, everyone has to choose what’s right in his unique situation, but if you’re hesitating with that plastic in hand, consider the following.
- You might not pay interest. We’ve been assuming your credit card has a terribly high interest rate and that you’ll be paying a huge amount to the credit card to pay off the charged taxes. If you’re savvy and have great credit, however, you might get a break. Look for credit cards that have a minimal or no interest rate on cash advances or charges. Take advantage of a special on a current credit card or open a new account especially to use to pay your taxes. Yes, you’ll still pay the convenience fee, but you’ll pay no interest for six or twelve months (depending on the best offer you can find), which is a deal even the government can’t beat.
- You can earn serious points. It works best if you have cash in hand, but if you have a credit card that helps you earn something nice – airline miles, dollars toward a new vehicle, or just free stuff – think of how much you can earn if you were to charge thousands of dollars in a tax payment. Since you have the cash readily available, it gets to sit in the bank earning a bit more interest for the next forty-five days or so until you pull it out and pay off the balance on the card. Not only did you earn a bit holding on to your cash, you also earned yourself something nice.
- You can keep the government out of your business. While highly subjective, it feels intrusive to a certain degree to voluntarily let the government into personal finances. Credit card balances aren’t exactly secret, but there are those who harbor such dislike or distrust for the government and the IRS that they would pay extra by using a credit card just to avoid having to deal with the government month after month making payments through its system.
- You’re coming into the money soon – just not soon enough. If you owe taxes and don’t have cash on hand because your loan isn’t approved yet or you’re expecting a big check in the mail, taking out a payment plan from the government doesn’t really make sense if you’re just looking at the next four to six weeks. In this case, it might be prudent to pay the taxes using a credit card and cross your fingers the money arrives before the balance payment is due.
Even if you miss the first month’s payoff, you’ll pay only a bit to carry the balance for a month or two while waiting. This plan only works if you are certain funds are coming, perhaps from the sale of a large ticket-item or a dividend or monetary gift. If you’re hoping to win the lottery in order to pay off your taxes, you’d be far better off working with the government to get the balance paid.